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ROAD TO RECOVERY

Finmeccanica may have turned a corner with the divestment of energy business Ansaldo Energia, but there is a lot of work still to do

By: Dan Thisdell

Alenia Aermacchi

Alenia Aermacchi MB-339s flown by the Frecce Tricolori display team

Like the country in which it is anchored, Italian industrial giant Finmeccanica has become accustomed to living with debt.

Indeed, when Finmeccanica announced on 4 October it had agreed a deal that will complete the divestment of energy generation business Ansaldo Energia, senior vice president Russell Solomon of debt ratings agency Moody’s summed up: "The balance sheet has been over-leveraged for some time, owing to declining earnings and higher borrowings."

Ansaldo, along with Finmeccanica’s road and rail transportation units, are the root of much of the company’s financial woes.

Solomon’s remark could just as well have been made about Italy itself. And, while the political leadership in Rome is showing tentative signs of getting to grips with the nation’s problems, the question must also be put to the leadership of the country’s aerospace industry champion: Is Finmeccanica doing what it must do to turn the corner?

From a debt perspective, there is no question that the Ansaldo deal is a big step in the right direction. The deal with Fondo Strategico Italiano values Ansaldo Energia at €777 million ($1.07 billion), plus up to another €130 million depending on performance through 2017. Finmeccanica had already sold 45% of the energy unit, so pro-rata will net Finmeccanica up to €520 million in cash and shed €220 million in net debt.

If most of that cash goes to pay down debt that stood at nearly €3.4 billion at the end of 2012 (see chart), Finmeccanica can soon take a chunk out of one of its biggest worries.

Without question, this divestment realises a key element in a restructuring plan set in motion after a disastrous 2011. At the time, Finmeccanica’s losses at its power and bus and rail transport divisions combined with a €750 million write-down against its Boeing 787 work to push the company to a net loss of more than €2.3 billion.

CORE BUSINESS

To get out of that hole, Finmeccanica spelled out a grand strategy that would see it focus on aerospace – aeronautics, space and, as a star unit, AgustaWestland helicopters. It also focused on defence electronics, including its Selex companies and, in the USA, DRS Technologies and security.

Energy and bus/rail were to go completely or be cut dramatically. Within the core businesses, the plan has been to command programmes where it is a leader, find partners in programmes where it has strengths but is not a market leader, and exit others.

Also, the plan is to rationalise facilities and headcount. Here, perhaps, the company again reflects the nation that created it in 1948, as part of its post-Second World War reconstruction efforts.

Finmeccanica – a contraction of “Finanziaria Meccanica” – was tasked to “acquire shareholdings in companies operating in the mechanical engineering and shipbuilding industry, handle their reorganisation and technical co-ordination and provide them, in the form considered most appropriate, with the necessary financial assistance”.

Nearly 70 years later it is perhaps not surprising to find the company – still 30.2% owned by the ministry of economy and finance – to be somewhat bloated and in need of refocusing. However, the fact that its rivals in Europe and even the more laissez-faire USA face the same problems to varying degrees, suggests that while Finmeccanica’s management is grappling with an extreme version of the challenge of the day, the company’s prospects should not be understated.

CONTAINING DEBT

First of all, as executive vice-president for strategy, business development and innovation Giovanni Soccodato told Flight International, Finmeccanica has no short-term financial problems. It wants to contain debt, and expects to achieve this by asset sales – divesting Ansaldo Energia represents a step towards slashing debt by €1 billion – as well as by improved operational performance. Soccodato underscores the group’s determination to streamline each business, and says that process improvements are starting to deliver results: “The last few months have improved significantly,” he adds.

If so, expect good news from this year’s third-quarter and full-term numbers.

But it may be too much to expect dramatic improvement. Following on from 2011’s €2.3 billion loss, Finmeccanica was still €792 million in the red in 2012. Debt levels are seasonal, as more than half of the company’s business is carried out in the second half. But as the bar chart shows, Finmeccanica has so far made little if any headway in paying down its debt.

Cash from divestments, then, looks important. In addition to an influx from the Ansaldo deal, there are suddenly prospects for offloading the bus and rail businesses, or at least lessening their drag on the group. Fondo Strategico Italiano, which is buying Ansaldo Energia, is talking with Finmeccanica about options.

As Soccodato puts it, with the help of its “natural industrial partners”, Finmeccanica hopes in the coming months to begin a “progressive disengagement from this sector”.

That leaves aeronautics, defence electronics and security.

In command: Pansa (left) and De Gennaro

Aeronautics, says Soccodato, is seeing the benefits of reorganisation. However, the Selex electronics businesses – which are now a single organisation – need a while longer. DRS, the US defence electronics business bought just before the financial crisis in 2008 – for what, from a post-crisis vantage point, looks like a wildly optimistic price of $5.8 billion – is today in a “sustainable state” despite US military spending cuts, says Soccodato.

As a first half 2013 snapshot of key indicators from Finmeccanica’s core business sectors shows (see table), operating performance needs a shot in the arm. Apart from the AgustaWestland helicopters business – where EBITA stands solidly in the double figures – operating profits might well be described as weak.

Here, it is critical to note that while selling Ansaldo Energia will shore up the balance sheet, it will do little to address underlying operational weakness. The same can be said of the bus and rail business.

In any case, before completion of the Ansaldo divestment, aerospace and defence accounts for about 85% of group sales. Afterwards that share will be around 90%. In short, Finmeccanica management has no place left to hide. The challenge now is execution.

As chief executive Alessandro Pansa tells Flight International, Finmeccanica – like its peers – is having to adjust to profound shifts in the competitive global aerospace environment. It is well known that Western aerospace and defence companies no longer enjoy much protection, if any, in their home markets. The withering of Western defence budgets is also a blow, and Western players are competing harder than ever in emerging markets where domestic players, which were once clients, are becoming rivals.

Less visible but equally disruptive is the fact that it is no longer possible to clearly separate military and civil technology – particularly in communications systems, says Pansa.

Ultimately, he says, any industrial group operating in a high-technology, capital-intensive sector like aerospace must operate in a limited number of sectors with what he calls “technological complementarities” that allow for R&D investment to be spread across the group. These “scope economics” must be turned into scale economies, enabling the group to be a price-maker, rather than a price-taker.

YEARS OF HARD WORK

Pansa says such a group must be international, and must establish significant industrial footprints in countries to which it had previously been an exporter.

With firm roots in Italy, the UK and the USA Finmeccanica is arguably doing all those things. But, Pansa notes, while the group’s strategy is easy enough to understand, it is going to take years of hard work to achieve.

Finmeccanica has its own unique difficulties. In one emerging market where its AgustaWestland range has demonstrable appeal, India, it faces an ongoing investigation into allegations that it resorted to bribery to secure a €560 million contract to supply 12 AW101 VVIP aircraft.

The investigation, including a probe by Italian prosecutors, has claimed several management scalps. These include that of Giuseppi Orsi – a former AgustaWestland head who rose to group chief executive and, in December 2011, also to chairman on the resignation, amidst a separate bribery investigation, of Pier Francesco Guarguaglini. When Orsi stepped down in February 2013, then-chief financial officer Pansa was made chief executive. And in July 2013, Gianni De Gennaro – a lawyer by training, with a long and distinguished career in government, fighting organised crime – was appointed chairman.

Led by a former banker with a clear strategic vision and an anti-corruption champion, Finmeccanica may be in the best possible hands given its current situation. Pansa, certainly, is optimistic. He stresses the need to resolve “negative issues” in India and remain a trusted supplier and partner there. He also stresses the “paramount importance” of winning – in the coming six months – major contracts in global markets for core products such as air traffic control, navigation, helicopters and Eurofighter.

As for executing new and existing contracts, Finmeccanica has a solid industrial base in the key markets of Italy, the UK and the USA, says Pansa. He adds: “I see no particular difficulty in marrying our institutional relationships around the world.”

He also notes that the Finmeccanica shares took a jump on the Ansaldo Engergia deal. That rise in market capitalisation, says Pansa, is a clear indication of investors’ confidence in the “credibility of management” to see through Finmeccanica’s new strategic plan.

For sure, he also recognises that nothing is made easier by Italy’s ongoing political drama. But, he says, management can feel the support of the Italian government, and while Finmeccanica is also listed in the UK and has a significant presence in the USA, “Italy is our reference country”.

“We, as Finmeccanica,” says Pansa, “are a company which is of course Italy-based. And we are proud to be an Italian company.”